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To actually answer your solo 401k question with a specific citation - check IRC section 401(c)(2)(A) which defines earned income for self-employed individuals, and 1.401(k)-1(a)(4)(ii) of the Treasury Regulations which specifically allows self-employed individuals to make employee deferrals based on this earned income. The confusion comes because the tax code uses weird terminology. For a sole prop, you're technically both the "employer" and the "employee" even though you don't pay yourself a W-2 salary. Your contribution limit as an "employee" is the standard 401k limit ($22,500 in 2023, $23,000 in 2024, plus catch-up if eligible), capped at your net earnings. The "employer" contribution is up to 25% of your net earnings after deducting half of SE tax. Fun fact: the IRS does refer to Schedule C income as your "compensation" for retirement plan purposes even though it's not technically compensation in the W-2 sense.
Thank you so much for the exact citations! This is exactly what I was looking for. One follow-up question: when calculating the 25% employer contribution limit, do I need to reduce my Schedule C net profit by the amount of any employee contributions I make first? Or is it 25% of the total net profit?
Great question. You calculate the 25% employer contribution limit based on your net self-employment income AFTER deducting your employee deferral contributions. So the calculation order is: 1) Start with Schedule C net profit, 2) Subtract half of self-employment tax, 3) Subtract your employee deferral contribution, 4) Calculate 25% of this resulting amount for your maximum employer contribution. This ensures you're not "double-dipping" on the employee contribution portion. This is outlined in IRS Publication 560, but it's definitely one of the more confusing aspects of solo 401k planning. The employer contribution is effectively limited to around 20% of your original Schedule C net profit when you factor in all these adjustments.
Has anyone mentioned the record keeping headache of having multiple solo 401ks??? I have three separate business activities and originally had separate 401ks for each. HUGE mistake. The Form 5500 filing requirements alone made me consolidate everything. If your businesses are truly separate, then yes get separate EINs. But consider using ONE 401k plan that covers all your businesses. Most providers like Fidelity or Vanguard can handle this - you just need to make sure the plan documents indicate it covers all your sole proprietorships. This way you get the administrative simplicity of one plan while still maintaining separate business identities. Just make sure you track contributions from each business separately for your own records. The IRS doesn't care which business made which contribution as long as the total stays under your combined limit.
That's interesting advice about having one 401k plan for multiple businesses. Do you need to file anything special with the IRS to indicate that the plan covers multiple sole proprietorships? Or do you just need to make sure the plan documents are set up that way with the provider?
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One thing nobody mentioned yet - for your son, you might be able to get a "letter of placement" from your state's child services department if they were involved in placing him with you. I had a similar situation with my nephew and that letter was accepted as proof for both relationship and residency for EITC purposes. Also, check with your son's school - they often have documentation that shows both your address and your relationship status (guardian, parent, etc). Schools usually keep records of who's authorized to pick up children, which can help establish your caretaker role even without the birth certificate.
Thanks for this suggestion! Child services wasn't involved in our case, but I hadn't thought about the school records angle. My son's elementary school does have me listed as the father and emergency contact. Would regular school reports with both our names and the home address work? Or do I need something more official from the administration?
Regular school reports with both your names and the home address can definitely work as part of your documentation package. But if possible, I'd recommend getting something more official from the school administration - like an enrollment verification letter that specifically states you're the parent/guardian and confirms the address. Most school offices can provide a letter like this if you explain it's for tax purposes. Ask them to include the full school year dates to show the child lived with you for more than half the year. School attendance records can also be helpful because they show consistent attendance from your address.
Don't forget that for EITC/ACTC audits, you can also use affidavits from people who know your living situation - like neighbors, clergy, or childcare providers. The IRS Form 8836 is specifically for this purpose and can be really helpful in cases like yours. Medical bills are also super useful proof, especially if they show you paying for your son's care at your address. Even if the paperwork shows the old street name, as long as it's clearly the same physical location, the IRS should accept it. They understand address formatting issues.
This is great advice! I worked at H&R Block for years and Form 8836 affidavits saved many clients with complicated documentation situations. Just make sure whoever fills it out knows they might get contacted by the IRS to verify the information. Also, make copies of EVERYTHING before sending it in!
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Does anyone know if this court ruling affects the transition tax installment payments? I elected to pay my Section 965 tax over the 8-year period, and I'm still making payments. Should I continue making them or wait for further guidance?
You definitely need to keep making those installment payments. The court ruling upheld the constitutionality of the tax, so the payment obligations remain in force. If you stop making payments, you'll likely face penalties and interest. I'm in the same boat - still paying the installments. The ruling basically confirms we have to keep paying. If you miss an installment payment, the entire remaining balance becomes due immediately, plus penalties and interest.
Thanks for the info. I was hoping there might be some relief, but I'll keep making the payments as scheduled. Still feels wrong to be taxed on money I never actually received as income. I've got 3 more years of payments to go.
I find it interesting how the court managed to avoid the wealth tax question entirely in their ruling. Reading between the lines, it seems like they're not ready to take a position on whether a true wealth tax would be constitutional. The deemed repatriation was a clever way to tax foreign holdings without technically calling it a wealth tax.
The Constitution only allows direct taxes if they're apportioned among the states by population, which makes a true wealth tax basically impossible to implement. This Section 965 thing was clearly designed to dance around that limitation by calling it an income tax rather than a wealth tax.
You're right about the apportionment requirement being the key constitutional obstacle. The clever part of Section 965 was that it targeted "income" that had technically never been taxed by the US, rather than existing wealth. By focusing on previously untaxed foreign earnings, it maintained the character of an income tax. I think the Court intentionally kept their ruling narrow to avoid setting any precedent for or against wealth taxes generally. They basically said "this specific tax is constitutional" without drawing any broader conclusions about wealth taxation. Political hot potato they clearly didn't want to touch!
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16 Former non-profit financial director here. One thing to keep in mind is that executive compensation at non-profits is supposed to be determined through a formal process called a "rebuttable presumption of reasonableness" which requires: 1) Review and approval by independent board members 2) Use of comparable salary data from similar organizations 3) Documentation of the decision-making process The board should be able to provide some explanation of how they arrived at the compensation figures. You have every right as an employee to question this, especially if the organization is claiming financial hardship when it comes to staff benefits. Look specifically at Parts VII and IX of the 990 form, which detail compensation and functional expenses. This might give you more insight into where money is being allocated.
8 Is there any way employees can challenge this if we think the process wasn't followed properly? I'm worried about retaliation if I bring this up internally.
16 You do have options. The safest approach is to file a confidential complaint with the IRS using Form 13909 (Tax-Exempt Organization Complaint Form). This allows you to report suspected excess compensation without identifying yourself. Another option is to contact your state's charity regulator or attorney general's office, as they often have oversight of non-profits as well. Many states allow anonymous reporting of concerns. If you're worried about workplace culture issues beyond just the compensation disparity, you might also consider reaching out to accreditation bodies in healthcare, as they often have standards regarding organizational ethics and governance.
21 My wife works for a similarly sized non-profit hospital and we went through the shock of seeing the executive compensation last year. One thing to understand is that those huge spikes in certain years might be from vested benefits or one-time payments. For example, if they have a Supplemental Executive Retirement Plan (SERP) that vests after 5 years, the whole amount shows up on the 990 in that year, making it look like they got a massive payday. It's still a lot of money, but spread over the vesting period, it might be somewhat less shocking. Check if your organization posts their audited financial statements too - sometimes they have notes that explain unusual compensation arrangements better than the 990 does.
5 That makes sense about the vesting. I'll definitely look into the financial statements to see if there's more detail. Do you know if there's a specific part of those statements I should focus on?
Ella Knight
The annualized income method (Form 2210 Schedule AI) is actually really helpful for people in your situation. Instead of making equal estimated tax payments, you can make payments based on your actual income for each period. Since you didn't have any income until April (which is in the second period), you wouldn't owe anything for the first quarter. Just make sure you're accounting for both income tax and self-employment tax in your calculations.
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William Schwarz
•Is the annualized income method complicated to use? I've heard some tax pros advise against it because it can be a headache to calculate properly.
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Ella Knight
•It's definitely more complex than the standard method of making four equal payments. You need to track your income by specific periods and essentially complete multiple mini tax returns throughout the year to determine each payment. The trade-off is that it can save you money if your income isn't earned evenly throughout the year. For someone who starts self-employment mid-year like the original poster, it's often worth the extra complexity. Most tax software can help with the calculations, or a tax professional can guide you through it if you're unsure.
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Lauren Johnson
Quick tip: if you're using tax software like TurboTax or H&R Block, they can actually help you calculate your estimated payments using both the regular method and the annualized income method. Just enter your projected quarterly income and it'll show you the minimum required payment for each quarter.
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Jade Santiago
•Are there any free options that can help with estimated tax calculations? The paid tax software seems expensive just to figure out quarterly payments.
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